Regulating Order Entry in an Electronic Trading Environment to Maintain an Actual Cost for a Trading Strategy

ABSTRACT

Regulating order entry based on an acceptable slop range for a trading strategy is described. According to one example embodiment, a trader may define an acceptable slop range for a trading strategy as a percentage. Using a spread trading algorithm, a spread price axis is generated and the trader may place an order for the trading strategy at a desired price, comprising placing an order in one leg market dependent on the market conditions of another leg market. Using the acceptable slop range, the system keep the net cost to the trader within the acceptable slop range, by regulating orders in the leg markets. Defining an acceptable slop range as a percentage allows the trader to monitor and regulate their profits and loss, regardless of the type of spread trading algorithm used or the placement of an order on the spread price axis.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.13/411,438 filed Mar. 2, 2012, which is a continuation of U.S. patentapplication Ser. No. 13/169,524 filed Jun. 24, 2011, now U.S. Pat. No.8,156,037, which is a continuation of U.S. patent application Ser. No.12/687,857 filed Jan. 14, 2010, now U.S. Pat. No. 7,996,300, which is acontinuation of U.S. patent application Ser. No. 11/482,625 filed Jul.7, 2006, now U.S. Pat. No. 7,672,898, entitled “Regulating Order Entryin an Electronic Trading Environment to Maintain an Actual Cost for aTrading Strategy,” the contents of which are fully incorporated hereinby reference.

FIELD OF INVENTION

The present invention is directed to electronic trading. Morespecifically, the present invention is directed towards regulating orderentry in an electronic trading environment.

BACKGROUND

Traders often use automated trading tools to implement tradingstrategies that involve simultaneous trading of two or more tradableobjects. One such trading strategy is commonly referred to as spreadtrading. In general, spread trading is the buying and/or selling of oneor more tradable objects, the purpose of which is to capitalize onchanges or movements in the relationships between the tradable objects.The tradable objects that are used to complete a spread are referred toas the outright markets or “legs” of the spread.

A commercially available software application that allows traders toelectronically trade spreads is AutoSpreader™ from Trading TechnologiesInternational, Inc. Features of the AutoSpreader™ trading tool aredisclosed in U.S. patent application Ser. No. 10/137,979, entitled,“System and Method for Performing Automatic Spread Trading,” filed onMay 3, 2002, the entire contents of which are incorporated herein byreference.

Using such a tool, a trader can input a price to buy or sell the spread,and the automated trading tool will automatically work orders in thelegs to achieve, or attempt to achieve the trader's desired price forthe spread. For instance, a trader might define buying a spread asbuying in leg A and selling in leg B. So, according to that definition,if the trader inputs a desired price to buy the spread, the automatedtrading tool will place a buy order in leg A, based on the bestguaranteed price that a sell order could be filled at in leg B. Theinstant that the order in leg A is filled, the automated trading toolsubmits a market sell order to leg B at the current best bid price.

As the market in leg B moves, the order in leg A may be re-priced toachieve the desired spread price. Re-pricing an order typically involvescanceling the existing order and replacing it with a new order atanother price. While effective for achieving a desired spread price,re-pricing the order can result in it being placed at the end of anorder queue corresponding to the order's new price at the electronicexchange. If, the new order loses queue position, then it may increasethe likelihood that the order will not get filled and the tradingstrategy will fail. Additionally, a fee is often charged by theelectronic exchange for re-pricing the order.

A trading tool, known as “slop” is used to limit the frequency at whichorders are re-priced in the leg of a spread. So long as the price forthe spread is within an acceptable range of prices defined by slop, thetrading application refrains from re-pricing the order. However, if theprice for the spread moves outside of the acceptable range of prices,the trading application re-prices the leg order, such that the desiredspread price can still be achieved. Slop is disclosed in U.S. patentapplication Ser. No. 10/137,979, entitled, “System and Method forPerforming Automatic Spread Trading,” filed on May 3, 2002.Additionally, slop is further described in U.S. patent application Ser.No. 10/403,333, entitled, “System and Method for Variably RegulatingOrder Entry in an Electronic Trading Environment”, filed on Mar. 31,2003, the entire contents of which are incorporated herein by reference.

There are a variety of different algorithms that can be used to tradespreads. One such spread trading algorithm is known as an impliedspread. The implied spread calculates the spread prices by simplysubtracting certain prices of one leg from certain prices of anotherleg. The implied spread prices are based on a cash value. Thus, theimplied spread prices equate to the actual cost of the spread to thetrader.

With slop, a spread can get filled at a price (within acceptable limitsdefined by slop) other than the desired spread price. The price thetrader actually gets for the spread is referred to herein as the “actualspread price.” The actual spread price is the price of the spread if theorders in the legs were filled at that moment in time. In impliedspreads, the actual spread price is equal to the actual cost of thespread.

To illustrate the implied spread algorithm, let's assume a trader hasdefined a spread with a leg A and a leg B and a slop value of “1.” Aslop value of “1” correlates to keeping the actual spread price within“1” value above or below the desired spread price. The followingexamples illustrate that when using the implied spread algorithm, thedifference between the actual cost of the spread and the desired cost ofthe spread remains within a consistent range, regardless of the desiredspread price.

For example, to buy the spread at “4,” the trading application willautomatically place a buy order in leg A based on the current best bidprice in leg B, with the purpose of buying leg A and selling leg B.Let's assume that the best bid price in leg B is currently at a price of“10,” therefore to achieve the desired spread price of “4,” an order isplaced at a price of “14” in leg A. To determine the order price in legA the following relationship is used:

Implied spread price=leg A price−leg B price

4=leg A price−10

leg A price=14

If the order in leg A gets filled at “14” and an offsetting order getssent to leg B, and fills at “10,” the actual spread price would be “4.”Therefore, the actual cost of the spread is “4” and can be calculated asfollows:

Actual spread cost=price bought in leg A−price sold in leg B

Actual spread cost=14−10

Actual spread cost=4

Based on a slop setting of “1”, the trader is willing to buy the spreadat prices of “3,” “4,” or “5.” This means that the market in leg B canmove between “9” and “11.” If the market in leg B moved up to “11” andthe leg orders were filled, the actual spread price would be “3.” Assuch, the trader would have bought the spread for $1 less/unit of thespread than previously anticipated. If the market in leg B moved down to“9” and the leg orders were filled, the actual spread price would be“5.” As such, the trader would have bought the spread for $1 more/unitof the spread than previously anticipated.

However, if the market in leg B moved up to “12,” it would result in anactual spread price of “2,” which is not within the acceptable sloprange of “3” and “5.” This would cause the order in leg A to re-pricefrom “14” to “16” to maintain the desired spread price of “4.”

In another example, the trader wishes to buy the spread at “10.”Currently, the best bid in leg B is still at a price of “10,” so anorder would be placed at a price of “20” in leg A (e.g., 10=20−10). Theactual cost of the spread would be “10.” Based on a slop setting of “1”,the trader is willing to buy the spread at prices of “9,” “10,” or “11.”This means that the market in leg B can move between “9” and “11.” Ifthe market in leg B moved up to “11” and the leg orders were filled, theactual spread price would be “9.” As such, the trader would have boughtthe spread for $1 less/unit of the spread than previously anticipated.If the market in leg B moved down to “9” and the leg orders were filled,the actual spread price would be “11.” As such, the trader would havebought the spread for $1 more/unit of the spread than previouslyanticipated.

However, if the market in leg B move up to “12,” the actual spread pricewould be “8,” which is not within the acceptable slop range. This actualspread price would cause the order in leg A to re-price to a price thatwould maintain the desired spread price of “10,” which in this examplewould be a price of “22.”

As shown by the previous examples, regardless of the desired spreadprice (e.g., a spread price of “4” and “10” were entered), when a legprice fluctuates, there is a directly correlation to the change in thecost of the spread. For instance, in the above examples, when the marketin leg B moved “1” price level, it causes the actual spread price tochange by “1” price level. This also means that the actual cost of thespread would change by $1 per unit.

To illustrate another spread trading algorithm, such as the dividespread algorithm, let's assume a trader has defined a spread with a legA and a leg B and a slop value of “1.” A slop value of “1” correlates tokeeping the actual spread price within “1” value above or below thedesired spread price. The following examples illustrate that when usingthe divide spread algorithm, the difference between the actual cost ofthe spread and the desired cost of the spread does not remain within aconsistent range, regardless of the desired spread price. In fact, whenusing the divide spread algorithm, there is an inconsistent differencebetween the desired spread cost and the actual spread cost when thedesired prices of the spread are different. To illustrate this concept,two separate spread orders will be entered into a divide spread window.As will be illustrated, the inconsistencies are due to the nature of thedivide spread algorithm, where instead of:

desired spread price=leg A price−leg B price

The divide spread algorithm calculates:

desired spread price=leg A price/leg B price

For example, to buy the spread at “10,” the trading application willautomatically place a buy order in leg A based on the current best bidprice in leg B, with the purpose of buying leg A and selling leg B.Let's assume that the best bid price in leg B is currently at a price of“10,” therefore to achieve the desired spread price of “10,” an order isplaced at a price of “100” in leg A. To determine the order price in legA the following relationship is used:

Divide spread price=leg A price/leg B price

10=leg A price/10

leg A price=100

If the order in leg A gets filled at “100 and an offsetting order getsent to leg B, and fills at “10,” the actual spread price would be “10.”Therefore, the actual cost of the spread is “90” and can be calculatedas follows:

Actual spread cost=price bought in leg A−price bought in leg B

Actual spread cost=100−10

Actual spread cost=90

Based on a slop setting of “1”, the trader is willing to buy the spreadat prices of “9,” “10,” or “11.” However, if the market in leg B moveddown to a price of “11,” it would result in an actual spread price of“9.09”, which is between the acceptable slop range of “9” and “11.”Therefore, if the order in leg B fills at a price “11,” the actual costof the spread will be $89, which results in the trader paying $1less/unit of the spread. The calculation is as follows:

Actual spread cost=price bought in leg A—price sold in leg B

Actual spread cost=100−11

Actual spread cost=89

In another example, the trader wishes to buy the spread at “4”.Currently the best bid in leg B is at a price of “10,” so an order isplaced at a price of “40” in leg A (e.g., 10=40/10). The actual cost ofthe spread would be “30” (e.g., 30=40−10).

Based on a slop setting of “1”, the trader is willing to buy the spreadat prices “3,” “4,” or “5.” If leg B moves up to a price of “13,” theactual spread price would still be between the acceptable slop range of“3” and “5.” Therefore, if the order in leg B fills at a price of $13,the actual cost of the spread will be $27, which results in the traderpaying $3 less/unit of the spread. The calculation is as follows:

Actual spread cost=price bought in leg A−price sold in leg B

Actual spread cost=40−13

Actual spread cost=27

As illustrated, applying the same slop functionality to differentmethods of spreads, can result in an inconsistent difference in actualspread cost and desired spread cost to the trader. Using the currentslop functionality with an implied spread produces the expected results,while using current slop functionality with the divide spread producesunexpected and possibly costly results to the trader. As describedabove, when using an implied spread, regardless of desired spread price,the actual cost to the trader remains within $1 of the desired cost ofthe spread. However, when using a divide spread, regardless of thedesired spread price, the actual cost of the spread inconsistentlyvaries depending on the desired spread price.

Thus, it is desirable to offer trading tools that can assist a trader inapplying the slop functionality to a variety of spread tradingalgorithms in an attempt to keep the actual cost to the traderconsistently within the acceptable range.

SUMMARY

The trading tools described herein may be put to advantageous use in anelectronic trading environment. By using any one or more of the tradingtools, the difference in the actual cost compared to the desired costmay be kept within a tolerable difference.

The example embodiments include defining an acceptable slop range for atrading strategy as a percentage. The method also includes defining acondition to associate with the trading strategy, such as the marketconditions or an actual spread price. Using the trading application, thetrader can input a desired price to buy or sell the spread, comprisingplacing an order in one leg market dependent on the market conditions ofanother leg market. Regardless of the desired spread price to buy orsell the spread, the actual cost of the spread remains within aconsistent tolerable difference from the desired cost of the spreadremains consistent. The tolerable difference is defined as thedifference in cost associated to the movements in the legs, before theleg order(s) are re-priced.

Additional features and advantages of the example embodiment will be setforth in the description that follows. The features and advantages ofthe example embodiment may be realized and obtained through theembodiments particularly pointed out in the appended claims. These andother features of the present embodiments will become more fullyapparent from the following description and appended claims, or may belearned by the practice of the example embodiments as set forthhereinafter.

BRIEF DESCRIPTION OF DRAWINGS

Example embodiments are described herein with reference to the followingdrawings, in which:

FIG. 1 is a block diagram illustrating a trading system for electronictrading according to an example embodiment, wherein the trading systemincludes a trading station where a trader can enter a desired price tobuy or sell a spread;

FIG. 2 is a block diagram illustrating another trading system forelectronic trading according to another example embodiment, wherein thetrading system includes a trading station where a trader can enter adesired price to buy or sell;

FIG. 3 is a block diagram illustrating an example trading station wherea user can submit bids and offers for a spread;

FIG. 4 is a block diagram illustrating the relationship between aspread, its underlying legs, and a synthetic spread order that has beenplaced;

FIG. 5 is a flow chart illustrating an example method for applying slopaccording to the example embodiments; and

FIG. 6 is a block diagram illustrating an example spread trading screenbased on the divide spread algorithm using slop defined as a percentage.

DETAILED DESCRIPTION

The present embodiments build on the concepts of automatic spreadtrading, slop, and the visual representation of each. These concepts aredescribed in U.S. patent application Ser. No. 10/137,979, entitled,“System and Method for Performing Automatic Spread Trading,” filed onMay 3, 2002, which describes methods used to automatically spread tradeone or more tradable objects simultaneously and the functionalityreferred to as slop, which limits the frequency at which orders arere-priced spread trading; U.S. patent application Ser. No. 10/403,333,entitled, “System and Method for Variably Regulating Order Entry in anElectronic Trading Environment”, filed on Mar. 31, 2003, which furtherdescribes the concept of slop; and U.S. patent application Ser. No.11/095,101, entitled, “Visual Representation and Configuration ofTrading Strategies,” filed on Mar. 31, 2005, which described methods ofvisually representing information pertaining to automatic spread tradingand slop; the contents of each are incorporated by reference herein.

I. Overview

As previously illustrated, applying the same slop values to differentmethods of spread trading results in inconsistent differences betweenthe actual spread cost and the desired spread cost to the trader. In anindustry where profits and losses are the driving force behind mosttrades, inconsistencies cost the trader time, money, and energy indetermining where to place orders.

When using a divide spread algorithm or a similar algorithm it is notguaranteed that the difference between the actual spread cost and thedesired spread cost will remain constant, as it does in regards to theimplied spread algorithm. The inconsistent price levels of thecalculated divide spread make it nearly impossible to apply theconventional slop functionality. Unfortunately, for traders who want touse the divide spread algorithm or similar algorithm, not being able toapply slop functionally to their spreads such that the actual spreadcost remains within a tolerable difference from the desired spread cost,can result in more re-pricing of orders, less than advantageous orderqueue location, more exchange related fees, and higher real costs to thetrader. The divide spread algorithm is one example of a tradingalgorithm that would normally result in inconsistent cost differences toa trader. While the present invention is not limited for use with dividespreads, the divide spread algorithm is utilized to illustrate theexample embodiments.

According to the example embodiments, slop is defined as a percentage toensure that the actual cost of the spread remains within a tolerabledifference from the desired cost of the spread. Applying slop as apercentage may produce the same difference between the actual spreadcost and the desired spread cost to the trader regardless of where thedesired spread order is placed.

While the example embodiments are described herein with reference toillustrative embodiments for particular applications, it should beunderstood that the example embodiments are not limited thereto. Othersystems, methods, and advantages of the present embodiments will be orbecome apparent to one with skill in the art upon examination of thefollowing drawings and description. It is intended that all suchadditional systems, methods, features, and advantages be within thescope of the present invention, and be protected by the accompanyingclaims.

II. A First Example Trading System

FIG. 1 is a block diagram illustrating an example electronic tradingsystem in which the example embodiments may be employed. In thisexample, the system comprises a trading station 102 that accesses anelectronic exchange 104 through a gateway 106. Router 108 is used toroute messages between the gateway 106 and the electronic exchange 104.The electronic exchange 104 includes a computer process (e.g., thecentral computer) that matches buy and sell orders sent from the tradingstation 102 with orders from other trading stations (not shown). Theelectronic exchange 104 may list one or more tradable objects fortrading. While not shown in FIG. 1 for the sake of clarity, the tradingsystem may include other devices that are specific to the client sitelike middleware and security measures like firewalls, hubs, securitymanagers, and so on, as understood by a person skilled in the art.

Regardless of the type of order execution algorithm used, the electronicexchange 104 provides market information to the subscribing tradingstation 102. Market information may include data that represents justthe inside market. The inside market is the lowest sell price (best orlowest ask) and the highest buy price (best or highest bid) at aparticular point in time. Market information may also include marketdepth. Market depth refers to quantities available at the inside marketand can also refer to quantities available at other prices away from theinside market. Additionally, the electronic exchange can offer othertypes of market information such as the last traded price (“LTP”), orthe last traded quantity (“LTQ”).

The computer employed as the trading station 102 generally can rangefrom a hand-held device, laptop, or personal computer to a largercomputer such as a workstation and multiprocessor. Generally, thetrading station 102 includes a monitor (or any other output device) andan input device, such as a keyboard and/or a two or three-button mouseto support click based trading, if so desired. One skilled in the art ofcomputer systems will understand that the example embodiments are notlimited to any particular class or model of computer employed for thetrading station 302 and will be able to select an appropriate system.

The computer employed as the gateway 106 generally can range from apersonal computer to a larger computer. Generally, the gateway 106 mayadditionally include a monitor (or any other output device), inputdevice, and access to a database, if so desired. One skilled in the artof computer systems will also understand that the example embodimentsare not limited to any particular class or model of computer(s) employedfor the gateway 106 and will be able to select an appropriate system.

It should be noted that a computer system that may be employed here as atrading station or a gateway generally includes a central processingunit, a memory (a primary and/or secondary memory unit), an inputinterface for receiving data from a communications network, an inputinterface for receiving input signals from one or more input devices(for example, a keyboard, mouse, etc.), and an output interface forcommunications with an output device (for example, a monitor). A systembus or an equivalent system may provide communications between thesevarious elements.

It should also be noted that the trading station 102 generally executesapplication programs resident at the trading station 102 under thecontrol of the operating system of the trading station 102. Also, thegateway 106 executes application programs resident at the gateway 106under the control of the operating system of the gateway 106. In otherembodiments and as understood by a person skilled in the art, thefunction of the application programs at the trading station 102 may beperformed by the gateway 106, and likewise, the function of theapplication programs at the gateway 106 may be performed by the tradingstation 102.

The actual electronic trading system configurations are numerous, and aperson skilled in the art of electronic trading systems would be able toconstruct a suitable network configuration.

III. A Second Example Trading System

FIG. 2 is a block diagram illustrating another example trading systemthat uses similar computer elements as shown in FIG. 1, in which, theexample embodiments may be employed to trade at multiple electronicexchanges. The system comprises a trading station 202 that can accessmultiple electronic exchanges 204 and 208. In this particularembodiment, electronic exchange 204 is accessed through gateway 206 andelectronic exchange 208 is accessed through another gateway 210.Alternatively, a single gateway may be programmed to handle more thanone electronic exchange. Router 212 is used to route messages betweenthe gateways 206 and 210 and the electronic exchanges 204 and 208. Whilenot shown in the figure, the system may include other devices that arespecific to the client site like middleware and security measures likefirewalls, hubs, security managers, and so on, as understood by a personskilled in the art. Additional electronic exchanges may be added to thesystem so that the trader can trade at any number of exchanges, if sodesired.

The trading system presented in FIG. 2 provides the trader with theopportunity to spread trade tradable objects listed at differentelectronic exchanges. To some traders, there can be many advantages witha multi-exchange environment. For example, a trader could view marketinformation from each tradable object through one common visual display.As such, price and quantity information from the two separate exchangesmay be presented together so that the trader can view both marketssimultaneously in the same window. In another example, a trader canspread trade different tradable objects listed at the differentelectronic exchanges.

As indicated earlier, one skilled in the art of electronic tradingsystems will understand that the example embodiments are not limited tothe particular configurations illustrated and described with respect toFIG. 1 and FIG. 2, and will be able to design a particular system basedon the specific requirements (for example, by adding additionalexchanges, gateways, trading stations, routers, or other computersserving various functions like message handling and security).Additionally, several networks, like either of the networks shown inFIG. 1 or FIG. 2, may be linked together to access one or moreelectronic exchanges.

IV. An Example Trading Station

FIG. 3 shows an overview of a trading station 300 which is similar tothe type of trading stations 102 and 202 shown in FIGS. 1 and 2. Tradingstation 300 can be any particular type of computing device, examples ofwhich were enumerated above. According to one example embodiment,trading station 300 has a trading application 302 stored in memory thatwhen executed arranges and displays market information in manyparticular ways, usually depending on how the trader prefers to view theinformation. Trading application 302 may also implement an automatedtrading tool such as the automated spread trading tool thatautomatically sends orders into underlying legs to achieve a spread.Additionally, the example embodiments for regulating and managing orderentry with the use of slop may be part of trading application 302.

Preferably, trading application 302 has access to market informationfrom one or more exchanges 310 through API 304 (or applicationprogramming interface), and trading application 302 can also forwardtransaction information to exchange 310 via API 304. Alternatively, API304 could be distributed so that a portion of the API rests on thetrading station 300 and a gateway, or at the exchange 310. Additionally,trading application 302 may receive signals from input device 312 viainput device interface 306 and can be given the ability to send signalsto display device 314 via display device interface 308.

Alternatively, the example embodiments described herein may be aseparate program from trading application 302, but still stored inmemory and executed on the trading station 300. In another alternativeembodiment, the preferred embodiments may be a program stored in memoryand executed on a device other than trading station 300. Example devicesmay include a gateway or some other well known intermediary device.

V. Automatic Spread Trading Overview

To assist in understanding how an automated spread trading tool mightwork, a general description is provided below. However, an automatedspread trading tool and its functions are described in greater detail inU.S. patent application Ser. No. 10/1137,979, filed on May 3, 2002 andentitled, “System and Method for Performing Automatic Spread Trading,”which has already been incorporated by reference.

The automated spread trading tool allows a trader to select two or moreindividual tradable objects, “legs,” to create a synthetic spread thatis sometimes referred to as a spread. The automatic spread trading toolpreferably generates a spread based on information in the legs and basedon spread setting parameters, which may be configurable by a user.

As used herein, the term “tradable object” refers to anything that canbe traded with a quantity and price. For example, tradable objects mayinclude, but are not limited to, all types of traded financial products,such as, for example, stocks, options, bonds, futures, currency, andwarrants, as well as funds, derivatives, and collections of theforegoing. Moreover, tradable objects may include all types ofcommodities, such as grains, energy, and metals. Also, a tradable objectmay be “real,” such as products that are listed by an exchange fortrading, or “synthetic,” such as a combination of real products that iscreated by the trader (e.g. spread). A tradable object could also be acombination of other tradable objects, such as a class of tradableobjects or a trading strategy.

The spread data is communicated to a graphical user interface where itcan be displayed in a spread window, and where data corresponding to thelegs of the spread may be displayed as well. At the client terminal, theuser can enter orders in the spread window, and the automated spreadtrading tool will automatically work orders in the legs to achieve, orattempt to achieve (because the fill of the order is not alwaysguaranteed) a desired spread.

FIG. 4 is a block diagram illustrating the relationship between asynthetically created spread 400, its underlying N legs 402, and aspread order 404 that has been entered. When a trader enters an order tobuy or to sell the spread (e.g., represented as spread order 404) in asynthetic market, the automated spread trading tool automatically placesorders in the appropriate legs to achieve or attempt to achieve thedesired spread 404. For example, to achieve synthetic spread order 404,the automated spread trading tool may automatically enter orders 406,408, 410 into the underlying legs 402. The automated spread trading toolmay, among other things, calculate the quantities and prices for theorders 406, 408, 410 based on market conditions in the other legs andone or more parameters.

According to the example embodiments, as the market conditions for eachleg move, an actual spread price may be calculated. As previouslystated, the actual spread price is the price of the spread if the ordersin the legs were filled at that moment in time. For example, if marketconditions for “Leg 1” change, then an actual spread price associatedwith order 404 may be determined to reflect the new market conditions.Similarly, if market conditions for “Leg 2” change, then an actualspread price associated with order 404 may be determined. Using anautomated spread trading tool, if the actual spread price is differentfrom the desired spread price, then the automated spread trading toolwould move or re-price the leg orders in an exchange order book tomaintain the desired spread price. In particular, the leg order(s) wouldbe deleted from the exchange(s), and new leg order(s) would be sent tothe exchange to maintain the desired spread price.

According to the example embodiments, however, before actually moving orre-pricing the leg orders in the exchange order book, the exampleembodiments may determine whether it is necessary to move or re-pricethe leg orders. To determine if it is necessary, the desired spreadprice and the actual spread price are compared to determine if theactual spread price is outside of the acceptable slop range. In otherwords, the example embodiments limit the frequency at which the tradingapplication moves or re-prices leg orders at the exchange based on anacceptable slop range.

Based on the concept of slop, if the actual spread price is within theacceptable slop range defined by the trader as a percentage, then theleg orders preferably do not move or get re-priced. If the actual spreadprice is outside of the acceptable slop range, then the leg orders arepreferably moved or re-priced to maintain the desired spread price. Itshould be understood that slop could also be defined for each leg andthe leg orders. For example, if the actual leg order price is not withinan acceptable slop range from the leg order price then the leg ordersare preferably moved or re-priced to the leg order in the exchange orderbook.

VI. Regulating Order Entry

FIG. 5 is a flow chart illustrating one example method 500 forregulating order entry based in an electronic trading environment basedon an acceptable slop range for a spread. Also, it should be understoodthat the flow chart only shows the functionality and operation of apossible implementation of the present embodiments. In this regard, eachblock may represent a module, a segment, or a portion of the code, whichincludes one or more executable instructions for implementing specificlogical functions or steps in the process. Alternative implementationsare included within the scope of the example embodiments of the presentinvention in which functions may be executed out of order from thatshown or discussed, including substantially concurrent or in reverseorder, depending on the functionality involved, as would be understoodby those reasonably skilled in the art of the present invention.

At 502, before the trading session begins, the trader initially definesthe desired spread to trade. Then trader may define the acceptable sloprange and the lowest acceptable price and the highest acceptable price.According to the example embodiments, the lowest acceptable price andthe highest acceptable price, for which a trader is willing to buy orsell a spread, correspond to the acceptable slop range set by thetrader. A slop value of “0” correlates to not using slop functionalityat all and indicates that the legs will be re-quoted every time themarket prices in the individual legs move. The larger the sloppercentage, the larger the acceptable slop range will be. A larger sloppercentage allows for more market fluctuation before the tradingapplication re-prices the leg orders. In the following examples, we willassume the trader has defined the acceptable slop range as 20% above orbelow the desired spread price. It should be understood that the lowestacceptable price and the highest acceptable price could differ from eachother.

At 504, a condition is associated with the desired spread price.Specifically, the condition is either the actual spread price or themarket conditions. The trading application compares the change in thecondition to the acceptable slop range when determining if the orders inthe legs require re-pricing. For example, if the market conditions movedto outside the acceptable slop range then the leg order(s) may bere-priced. Similarly, if the actual spread price moved outside theacceptable slop range, then the leg order(s) may be re-priced. Thefollowing examples will use the actual spread price as the conditionassociated with the spread price.

At 506, a desired spread price (and quantity) can be entered. Using thegraphical interface associated with the trading application, the tradercan enter, delete, or modify orders. Upon setting a desired spreadprice, the trading application places an order in “leg A”, based on themarket conditions in “leg B”. The trading application looks to the orderin “leg A” and the market conditions in “leg B” to calculate the actualspread price. Due to constantly moving market conditions, it is possiblethat the actual spread price might differ from the desired spread price.Based on the example embodiments, if the actual spread price differs toomuch (or is outside the acceptable slop range) from the desired spreadprice, the leg orders may be re-priced to maintain the desired spreadprice and a keep the actual cost of the spread within a tolerabledifference from the desired cost of the spread.

At 508, the trading application determines the acceptable slop rangebased on the defined percentage. To determine the acceptable slop range,the trading application may use the following relationships:

Lowest Acceptable Price: desired spread price*(100−slop)/100

Highest Acceptable Price: desired spread price*(100+slop)/100

At 510, based on previously determined acceptable slop range, thetrading application compares the actual spread price to acceptable sloprange. Based on the comparison, the trading application determines ifthe actual spread price is beyond the acceptable slop rage defined bythe slop parameters. To determine if the actual spread price is beyondthe acceptable slop range, the trading application uses the followingcomparison:

Lowest Acceptable Price<=Actual Spread Price<=Highest Acceptable Price

If the comparison is satisfied (true), then the actual spread price iswithin the acceptable slop range and the leg order(s) are not re-priced.The trading application would go back to step 508 and wait for anotherchange in the actual spread price to determine if the leg orders shouldbe re-priced. If the calculation is not satisfied (false), the actualspread price is not within the acceptable slop range. In this situation,at least one of the orders in the legs must be re-priced to maintain thedesired spread price.

At 512 the actual spread price has been determined to be outside of theacceptable slop range, thus causing the leg orders to be re-priced bythe trading application. The result of the leg orders being re-priced isthe desired spread price is maintained by the trading application.

VIII. Example

FIG. 6 is a block diagram illustrating an example spread trading screenbased on the divide spread algorithm using slop defined as a percentage.Specifically, FIG. 6 includes a spread trading screen 600 containing aworking quantity column 602, bid quantity column 604, ask quantitycolumn 606, and price column 608. The working quantity column 602displays desired orders to buy or sell the spread. The bid quantitycolumn 604 displays buy order quantities available in relation tocertain price levels in price column 608. The ask quantity column 606displays offer order quantities available in relation to certain pricelevels in price column 608. FIG. 6 also displays trading screens for legA 610 and leg B 612, which display the same columns as trading screen700.

To illustrate the example embodiments, let's assume that slop has beendefined as 20%. Specifically, a slop of 20% determines the trader iswilling to accept a spread price of 20% above or below the desiredspread price or an actual spread cost of +/−20%. As previouslyillustrated, when using conventional slop with a divide spread, theactual cost of the spread does not remain within a consistent tolerabledifference from the desired cost of the spread, based on the pricemovements in the legs. However, when using slop defined as a percentage,the actual cost of the spread remains within a consistent tolerabledifference from the desired cost of the spread, and regardless of wherethe spread order is placed, slop defined as a percentage keeps the legprices from fluctuating such that the actual spread price is beyond theacceptable slop range.

The divide spread algorithm uses the following relationship to determinethe spread price:

desired spread price=leg A price/leg B price

Based on the divide spread algorithm, to buy the spread at “10” alongspread price column 608, the trading application will automaticallyplace an order in leg A 610 based on the current best bid price in legB, with the purpose of buying leg A and selling leg B. As shown intrading screen 612, the best bid price in leg B is currently at a priceof “10,” therefore to achieve the desired spread price of “10,” an orderis placed at a price of “100” in leg A 610. To determine the order pricein leg A the following relationship is used:

desired spread price=leg A price/leg B price

10=leg A price/10

leg A price=100

In another embodiment, although the slop range is defined as 20%, thetrading application may calculate the range so the trader knows theactual price values that fall within the 20% slop range. For example, todetermine the acceptable slop range the trading application uses thefollowing relationship:

Lowest Acceptable Spread Price=desired spread price*(100−slop)/100

8=10*(80/100)

Highest Acceptable Spread Price=desired spread price*(100+slop)/100

12=10*(120/100)

If the order in leg A gets filled at “100” and an offsetting order getssent to leg B, and fills at “10,” the actual spread price would be “10”(e.g., 10=100/10). Therefore the actual cost of the spread is “90” andcan be calculated as follows:

Actual spread cost=price bought in leg A−price bought in leg B

Actual spread cost=100−10

Actual spread cost=90

Based on a slop setting of 20%, the trader is willing to buy the spreadwithin the prices of “8” and “12,” which correlates to the market in legB moving down one price level to “9” or up two price levels to “12.” Ifthe order in leg B 612 moves up to a price of “12,” and fills, it wouldresult in an actual spread price of “8.33” (8.33=100/12). The actualspread cost would be “88,” which results in the trader paying $2less/unit of the spread, before the leg A order would be re-priced tomaintain the desired spread price.

The actual spread cost is calculated as follows:

Actual spread cost=price bought in leg A−price sold in leg B

Actual spread cost=100−12

Actual spread cost=88

However, if the market in leg B 612 moved down to “9,” it would resultin an actual spread price of “11.11” (11.11=100/9). The actual spreadcost would “91” (e.g., 91=100−9), which results in the trading paying $1more/unit of the spread, before the leg A order would be re-priced tomaintain the desired spread price.

The actual spread cost is calculated as follows:

Actual spread cost=price bought in leg A−price sold in leg B

Actual spread cost=100−9

Actual spread cost=91

However, if the market in leg B 612 moved just “1” price level furtherin either direction, or “3” up or “2” down, to a price of “8” or “13,”it would result in the actual spread price falling outside theacceptable range. The leg A order would be re-priced to maintain thedesired spread price.

In another example, the trader wishes to buy the spread at “4” insteadof “10.” Currently, the best bid in leg B 612 “10”, so an order would beplaced at a price of “40” in leg A (e.g., 10=40/10). The actual cost ofthe spread would be “10.”

The trading application uses the same calculation to find the acceptableslop range based on the desired spread price:

Lowest Acceptable Price=desired spread price*(100−slop)/100

3.2=4*(80/100)

Highest Acceptable Price=desired spread price*(100+slop)/100

4.8=4*(120/100)

Based on the slop setting of 20%, the trader is willing to buy thespread within the prices of “3.2” and “4.8.” As previously shown, whenthe order to buy the spread is placed at a price of “10” the acceptableslop range equates to “2” above and below the desired spread price,where 20% of “4” equates to an acceptable slop range of “0.8” above andbelow the desired spread price. However, regardless of where the desiredspread order is placed, the actual cost of the spread will remain withina tolerable difference from the desired cost of the spread. Aspreviously stated, the tolerable difference is defined as the differencein cost associated to the movements in the legs, before the leg order(s)are re-priced. If the market in leg B 612 moves up to a price of “12”and fills, it would result in an actual spread price of “3.33” (e.g.,3.33=40/12). The actual cost of the spread would be “28” (28=40−12). Assuch, the trader would have paid $2 less/unit of the spread.

However, if the market in leg B 612 move down to a price of 9 and fills,it would result in an actual spread price of “4.4” (4.4=40/9). Theactual cost of the spread would be “31” (31=40−9). As such, the traderwould have paid $1 more/unit of the spread.

As illustrated, when the desired spread order is placed at a price of“4,” the actual spread price can differ from the desired spread price byonly “0.8” price values to remain within the 20% acceptable slop range.Whereas when the desired spread order was placed at a price of “10,” theactual spread price could differ from the desired spread price by avalue of “2” price values, to remain within the 20% acceptable sloprange.

However, as shown in the previous examples, regardless of the desiredspread price, defining slop as a percentage keeps the actual cost of thespread within a consistent tolerable difference from the desired cost ofthe spread. Referring back to the examples, when the desired spreadorder was placed at a price of “10,” the trading applicationconsistently only allowed leg B to fluctuate within “2” prices above or“1” price below before the actual spread price fell outside theacceptable slop range of “8” to “12.”Specifically, the actual cost ofthe spread was kept within the tolerable difference of “$1 above or “$2”below, or between “$91” and “$88”, when the desired cost of the spreadof was “$90.” Similarly, when the desired spread order was placed aprice of “4,” the trading application also kept the price movements inleg B to within “2” price levels above or “1” price level below, beforethe actual spread price fell outside the acceptable slop range of “3.2”to “4.8.” Specifically, the actual cost of the spread was kept withinthe tolerable difference of “$1 above or “$2” below, or between “$31”and “$28”, when the desired cost of the spread of was “$30.” Definingslop as a percentage when using the divide spread algorithm, keeps thedifference between the actual cost of the spread and the desired cost ofthe spread within the defined tolerable difference, regardless of wherethe desired spread order is placed.

CONCLUSION

The example embodiments discussed above describe a method that regulatesorder entry to maintain an actual cost of a trading strategy. Toregulate order entry to maintain an actual cost of a trading strategyaccording to one example embodiment, the method allows a trader todefine an acceptable slop range as a percentage. The method alsoincludes defining a condition to associate with the trading strategy.Using the trading application, the trader can input a desired price tobuy or sell the spread, comprising placing an order in one leg marketdependent on the market conditions of another leg market. Regardless ofthe desired spread price to buy or sell the spread, the actual cost ofthe spread remains within a consistent tolerable difference from thedesired cost of the spread. The present invention is not limited in useto a certain type of spread algorithm or to a particular GUI.

A trader will benefit from the consistent tolerable difference betweenthe actual cost of the spread and the desired cost of the spread. Atrader will also be able to focus their attention on market conditions,placing new spread orders, and managing their existing spread ordersinstead of attempting to determine their profits and lossescorresponding to each spread order.

The above description of the example embodiments, alternativeembodiments, and specific examples, are given by way of illustration andshould not be viewed as limiting. Further, many changes andmodifications within the scope of the present embodiments may be madewithout departing from the spirit thereof, and the present inventionincludes such changes and modifications. For example, the previouslydescribed embodiments are not limited to a particular type of spreadtrading algorithm or a particular spread definition. It should beunderstood that although the example embodiments utilized a spread thatplaced an order to buy leg A and an order to sell leg B, that anyvariation could be used, such as selling in leg A and buying in leg B.Alternatively, it should be understood that a spread could involve morethan two legs, as shown in the example embodiments.

It will be apparent to those of ordinary skill in the art that methodsinvolved in the system and method for dynamically determining quantityfor risk management may be embodied in a computer program product thatincludes one or more computer readable media. For example, a computerreadable medium can include a readable memory device, such as a harddrive device, CD-ROM, a DVD-ROM, or a computer diskette, having computerreadable program code segments stored thereon. The computer readablemedium can also include a communications or transmission medium, suchas, a bus or a communication link, either optical, wired or wirelesshaving program code segments carried thereon as digital or analog datasignals.

The claims should not be read as limited to the described order orelements unless stated to that effect. Therefore, all embodiments thatcome within the scope and spirit of the following claims and equivalentsthereto are claimed as the invention.

1. (canceled)
 2. A method including: determining by a computing devicean acceptable range of prices for a trading strategy based on a desiredstrategy price and a slop percentage value such that an actual cost ofthe trading strategy, when executed, is within a consistent tolerabledifference from a desired cost of the trading strategy, regardless ofthe desired strategy price, wherein the trading strategy includes afirst leg for a first tradable object and a second leg for a secondtradable object; generating by the computing device an order message foran order to trade the first leg with a price based on the desiredstrategy price and a condition in the second leg; detecting by thecomputing device a change in the condition in the second leg; anddetermining by the computing device whether the change in the conditionin the second leg would cause the actual cost of the trading strategy,if executed, to fall outside of the acceptable range of prices and, ifso, re-pricing the order to trade the first leg to maintain the desiredstrategy price, and, if not, refraining from re-pricing the order totrade the first leg.
 3. The method of claim 2, wherein the sloppercentage value is received from a user.
 4. The method of claim 2,wherein the desired strategy price is received from a user.
 5. Themethod of claim 2, wherein the trading strategy is a spread.
 6. Themethod of claim 2, wherein the trading strategy is a divide spread. 7.The method of claim 2, wherein the acceptable range of prices includes alowest acceptable price and a highest acceptable price.
 8. The method ofclaim 7, wherein determining the acceptable range of prices includes:determining the lowest acceptable price using the followingrelationship:lowest acceptable price=desired strategy price*(100−sloppercentage value)/100; anddetermining the highest acceptable price using the followingrelationship:highest acceptable price=desired strategy price*(100+sloppercentage value)/100.
 9. The method of claim 7, wherein the sloppercentage value includes a low slop percentage value and a high sloppercentage value, wherein the low slop percentage value is differentfrom the high slop percentage value.
 10. The method of claim 9, whereindetermining the acceptable range of prices includes:determining the lowest acceptable price using the followingrelationship:lowest acceptable price=desired strategy price*(100−lowslop percentage value)/100; anddetermining the highest acceptable price using the followingrelationship:highest acceptable price=desired strategy price*(100+highslop percentage value)/100.
 11. The method of claim 2, wherein the priceof the order to trade the first leg is determined based on the desiredstrategy price and the condition in the second leg according to atrading strategy definition.
 12. The method of claim 2, wherein thecondition is a current price at the inside market.